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Tuesday, 5 November 2013

EXPORT DIVERSIFICATION AND ECONOMIC TRANSFORMATION IN AFRICA

Though the African continent is undergoing significantly positive
reforms and macroeconomic metamorphosis, its share of total regional trade
comprises a mere 12 per cent in 2010. In fact, the continent lags behind other
regions in terms of export diversification, and is actually gravitating towards
further concentration in its export commodities. The general trend over the
last decade is one of gradual move towards less diversification for Africa.

Against this background, in January 2012, the African Union Summit of
African Heads of State and Government endorsed the theme of ‘Boosting
Intra-African Trade’, paving the way towards fast-tracking a Continental Free
Trade Area (CFTA)[1]
with a tentative timeframe of 2017. The Summit which also recognized the low
level of trade between African countries, called upon Member States, Regional
Economic Communities (RECs) and the African Union Commission (AUC) to promote
industrial development policy and value addition in order to diversify African
economies and thereby move away from heavy reliance on traditional primary
exports.

There are copious evidences on the direct relationship
between export diversification[2]
and growth dynamics (UNECA and AUC, 2007, 2011; Karingi and Spence, 2011). Kilnger and Lederman (2006) and Cadot, Carrere and Strauss-Khan (2008)
discuss that the process of diversification (as opposed to export growth) in
low income countries is driven by inside the frontier innovation (emulations)
and extensive expansion, suggesting that African countries should undertake new export
activities if it is to succeed in diversifying its exports, but that they
should be in industries in which there is already existing expertise.

In fact, some countries have struggled to diversify and
orientate into new sectors due to rising commodity prices which subsequently
results in an ever increasing concentration of exports, enclave economies and
Dutch disease syndrome[3].
Further, countries such as Mozambique, Rwanda, Liberia and Sierra Leone, which experienced
conflicts and negative diversification prospects in the past, are currently
exhibiting positive diversification outcomes in more stable years.

The traditional strategy of export
promotion which focuses on the international marketing of final goods appears
increasingly inappropriate for African economies, but the adoption of different
routes to diversification which could include resource-based manufacturing and
processing of primary products. Africa needs to promote diversification by
strengthening regional markets, competitiveness and economic integration. In
other words, African countries need to diversify their total exports bases in
order to foster better market access conditions, together with increased
productivity in traditional and non-traditional crops. The creation and
facilitation of such trade, and its diversification, foster economic
transformation, and also reduces the risk from concentrating in very small numbers
of agricultural export commodities.

Gbadebo Odularu

Policy and Markets Analyst, FARA

[1]The
need to enhance intra-African trade among African countries led to the formation
of the EAC-COMESA-SADC (East African
Community; Common Market for Eastern and Southern Africa and the Southern Africa Development
Community) tripartite Free Trade
Agreement (TFTA) as well as the proposed 2017 Continental FTA (CFTA) between Cairo
and Cape Town. The tripartite agreement is expected to enable participating
economies take full advantage of the economies of scale and other benefits
(such as income and employment generation) of greater market integration.

[2]Export diversification is the expansion
of exports due to new products—extensive margin—or export more of current
products—intensive margin. Amurgo-Pacheco and Pierola (2008) provide a useful
narrower definition by introducing a geographic dimension which precise that
intensive margin is the expansion of exports based on existing products to
existing export markets.

[3] Dutch Disease theory states that a ‘resource
export boom has an inherent tendency to distort the structure of production in
favour of the non-traded goods sector vis-à-vis the sectors producing the
non-booming tradeables. The Syndrome originates from the experience of the
Netherlands after its 1960’s natural gas and oil discovery, which resulted in
an export boom and balance of payments surplus for the Dutch economy